The basicsÂ
An agricultural tenancy granted before 1 September 1995 will, in general, fall under the Agricultural Holdings Act 1986 (AHA tenancies). The implication of these, and the succession rights are as important today as they were 20 years ago.
An AHA tenancy allows the tenant the benefit of securing generational succession of the farm, whereas the landlord has a valuable asset tied up for years with detrimental inheritance tax (IHT) implications.
Most tenancies granted on or after 1 September 1995 are farm business tenancies (FBTs). These generally run for a shorter period, and offer no succession terms for the next generation.
IHT relief on a pre-1986 tenancy will only qualify for 50% agricultural property relief (APR), whereas a post 1986 tenancy, including FBT’s qualify for 100% APR.
When does succession occur?
Succession to an AHA tenancy can occur on retirement, or the death of a tenant.
On retirement, a succession application must be made within one month of the retirement notice. On death, the application must be made within three months of the date of death.
Qualifying criteria
A successor must meet the following criteria:
- Close relative test: The applicant is a close relative of the tenant.
- Livelihood test: The applicant’s principal source of income is from the holding.
- Commercial unit test: The applicant does not occupy other land which by itself is economically viable for agriculture.
- Suitability test: The applicant is a suitable person to succeed the tenancy.
From 1 September 2024 the Agriculture Act 2020 comes into force, this changes some of the requirements by:
- Removing the minimum retirement age – a retirement application can be made at any time.
- Removing the commercial unit test – the applicant can have an interest in a separate holding.
- The successor will now need to show they can farm commercially, and at high standards.
The livelihood test
The livelihood test continues to be a key part of a succession application. It is a question of fact whether most of the applicant’s income is derived from agricultural activities from the holding. This test must be met for five out of the last seven years.
Diversified farm income such as rental and some contracting is classed as non-agricultural activities and will need to be considered when looking at the livelihood calculations. It is helpful, therefore, for a future tenant to continue to review the business activities, and their income
from outside of the holding.
Summary
AHA tenancies face complicated succession rules. There can be significant legal and accountancy costs for both the landlord, and tenant if a full review of the livelihood test is required.
Where landlord and tenant can work together, it is possible for an old AHA tenancy to be surrendered for a post 1986 tenancy on similar terms, this can be mutually beneficial to both parties.
Due to the changing picture of agriculture, with more farms becoming diversified, tenants need to make sure that they will pass the livelihood test.
For further advice please contact our specialist Farms and Estates team below.
